HIVE EXCLUSIVE: A View From Down Under

International territories are becoming a hot testing ground for new ideas and strategies in film studios’ struggle to come up with ways to get a share of burgeoning DVD rental revenues.

The latest: In Australia, Warner Home Video says that beginning with August titles, it will produce two different DVD versions of new releases, one for the rental marketand another for sellthrough.

In what Warner executives concede is a harbinger of what they’d like to do in the United States, the discs street the same day and contain the same programming and special features. The onlydifferences are the price and the color. The blue rental disc sells for $55 Australian ($27.50 U.S.) or may be obtained through revenue-sharing at an upfront fee of $6 Australian. The silver sellthrough disc wholesales for $24 Australian ($12 U.S.) and may not be rented, Warner says, under Australian copyright law that gives content holders control over the use of their product even after the first sale.

"It’s a way of applying Australian copyright law to enable Warner Home Video to generate DVD margins on rental similar to those associated with VHS rental, without foregoing thesignificant volumes driven by simultaneous availability of DVD for sale," says Jim Cardwell, Warner’s executive v.p. for North America and Australia.

At least one Australian retailer isn’t happy with the arrangement, because retailers who don’t want to pay the higher price for rental discs will have no choice but to bring product in under revenue-sharing. "I am a supporter of revenue-sharing models, but I don’t like having a gun to myhead," says Simon Shaw of Network Video.

Warner’s new DVD strategy down under is raising eyebrows here in the United States because of the strong similarities between the two markets. "The retail structure is very much like that in the United States, in that there are a number of very sophisticated rental chains as well as a verydeveloped mass merchant business for sellthrough," says Eric Doctorow, president of worldwide video for Paramount Pictures.

And yet importing this DVD strategy to the United States would be very difficult, observers say, because the First Sale Doctrine would preclude Warner from forbidding retailers to rent the cheaper sellthrough discs. Still, that may not be a sufficient obstacle to keep Warner from at least trying the approach. Cardwell won’t comment, but other sources at Warner say the studio would very much like to import a similar plan to the United States to prevent any further drain on the studio’s rentalrevenue, but hasn’t yet figured out a way to do so without violating the First Sale Doctrine.

Meanwhile, the president of one of the five other major studios’ home video divisions says the Warner plan could work in the United States even without a legal enforcement mechanism. "We mayhave First Sale, but we can have our own sales force and we can sell our movies to whoever we want to," he says. "It’s just like in theatrical, where not everybody who wants a print gets it. I don’t know if under current law we can stop [retailers] from going to mass merchants [to buy the cheaper discs], but we can stop any mass merchant who is trans-shipping, who is in the business of wholesaling rather than retailing, if we so choose.

"We can also refuse to sell to direct accounts andcontrol our product further by limiting or eliminating wholesale distribution."

Another studio source also says the Warner plan could work in the United States through an exclusive, direct-to-retail distribution arrangement and strict policing of trans-shipping. "If a retailer iscaught renting a sales disc, we’d cut him off," this studio executive says, comparing this enforcementapproach to the way studios enforce minimum advertised price, street date and other policies.

Warner’s Australian revenue-sharing concept is just one of several approaches American movie studios are employing abroad to get a piece of the lucrative DVD rental pie. In England, forexample, at least three major studios release a bare-bones rental-priced DVD first, followed by a feature-packed sellthrough version between two and six months later. The strategy originated with Fox Home Entertainment with the May 2000 release of Fight Club; Buena Vista HomeEntertainment and DreamWorks Home Entertainment followed suit. Fox and Disney have recently deployed similar DVD strategies in Germany, Spain, Italy and Australia.

Columbia TriStar Home Entertainment, meanwhile, is experimenting with DVD revenue-sharing in the United Kingdom, France, Japan and Scandinavia, according to Benjamin Feingold, president of the Columbia TriStar Motion Picture Group and leader of the studio’s home entertainment division.

In these and other foreign countries, the absence of federal regulations like First Sale gives the studio tighter control over its product, Feingold says. Accordingly, dealers who want to rent Columbia TriStar DVDs must hold studio licenses to do so, he says; under the revenue-sharing trials, DVDs have no set price, but rentailers may only purchase them through revenue-sharing.

Analyst Tom Adams of Adams Media Research says he’s not surprised studios are going abroad to test ways to share DVD rental revenues. In the United States, he says, the sellthrough market is too big for them to tinker with success — at least for now. "In other countries, sellthrough is less of afactor," Adams says.

Still, Adams believes it’s "up in the air" as to which of these programs, if any, will ultimately migrateto the United States. "The key uncertainty is how high is up on the sellthrough side," he says, referring to exploding DVD software sales. If consumers keep buying discs at their current rate, the rental market is less of a worry to studios, he says. "But if it’s going to go down, that could be adifferent story. And it is likely to go down; the only question is, how much, and there are different opinions among the studios on whether it’s better to leave the rental market alone and hopefully make up the difference through continued robust DVD sales, or to go in and make some sort of change that could potentially jeopardize sellthrough’s growth curve."